Euro Forecast as of 25 Jan 2021

Jan 25, 2021

A poor reading of the euro-area PMI hasn’t discouraged the EURUSD bulls. However, the euro rally may face several obstacles. Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

The euro-area economy is about to slide into a double-dip recession. According to Bloomberg’s source familiar with the matter, Germany’s government should revise the GDP forecast down from 4.4% to 3% in 2021. Vaccination is progressing extremely slowly in Europe, and the EU countries extend lockdowns. Nonetheless, the euro continues rising. When all major currencies are going down, the EURUSD is growing because investors believe the dollar is falling faster than the euro. The dollar has different reasons for a downtrend.

The market believes the US-China relationships are all right, the US QE is not likely to scale down, and there should be a new fiscal stimulus package of $1.9 trillion provided by Joe Biden. As long as the greed encourages investors, the S&P 500 continues to rally up, and safe-haven assets are under pressure. The situation could turn upside down at any moment. The Republicans are not willing to give up power in the Senate. The dispute between the Congress and the White House could trigger a drawdown in the US stock market. About 88% of 40 experts surveyed by Bloomberg believe that the Fed’s next step will be to slow down the QE monthly pace.

The euro-area composite PMI has been down to 47.5 in January, which signals an economic downturn. I suppose the euro is growing because purchasing managers’ optimism about the next 12 months improved to a three-year high for manufacturers. Investors understand that everything is bad now but continue to stay positive. The markets are growing on the rumors. However, the November-December plans need to be adjusted.

In Late 2020, amid the introduction of COVID-19 vaccines, investors were full of optimism about a soon victory over the pandemic and the associated end of lockdowns, followed by a rapid rebound of the global GDP and international trade. The EURUSD rally was natural. The US dollar, being a safe haven, didn’t have any chances. It was the end of Donald Trump’s age marked with extreme uncertainty when Twitter was more important than economic data.

Weekly EURUSD trading plan

In January, it turned out that the plans had to be postponed. This is due to the ongoing pandemic and slow vaccination. Three weeks should pass between the first and second injection, then three more to develop immunity. Obviously, the victory over the coronavirus is postponed, so why continue to buy euros? The EURUSD bulls begin to doubt. If the S&P 500 goes down because of Congress or China, the euro could also fall. If the euro bulls fail to hold up the price above $1.2125 and $1.208, it will be the first sign of their weakness.

After all, as long as the S&P 500 is strong, and the Fed is willing to keep the interest rates low and the QE pace unchanged, the breakout of resistance levels at 1.221 and 1.224 can support the EURUSD rally. I do not believe the rise will be high without the vaccination acceleration.